Demand-Side Platforms In 2020: Network Effects And Risk Of A Winner-Take-All Market

"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Danilo Tauro, global media manager at Procter & Gamble.

The top demand-side platforms (DSPs) have grown substantially in the last few years, boosted in part by the growing integration of over the top (OTT) and connected TV (CTV), which led to a 330% increase in programmatic OTT/CTV ad transactions in 2019, according to Pixalate.

Within the DSP market, many players are active and sizable, but looking at revenue, the top four players comprise an estimated 90% of the market, with the top two accounting for the lion’s share.

The DSP category faces a mix of external pressures, including the liquidity crunch from the pandemic, privacy laws, third-party cookie loss and the growth of walled gardens, which account for 79% of non-search digital advertising, as reported by Jounce Media. These pressures, along with structural industry factors, may lead to the DSP space becoming a winner-take-all market, where one player represents almost totality of the market.

As shared in “Business of Platforms,” there are four main industry criteria for winner-take-all markets:

  1. Strong network effects (primarily)
  2. High multihoming costs
  3. High entry barriers
  4. Low ability to differentiate

These criteria can accelerate consolidation and reward the platform that best leverages these underlying dynamics, especially when it comes to independent DSPs.

The ecosystem and the sources of value

The ad tech ecosystem has become increasingly complex in the last five years, with a growing number of stakeholders. The three main actors are advertisers (who fund the ecosystem), publishers (who expose users to ads) and supporting partners (they range from agencies to tech solutions and enable connections between publishers and advertisers, with DSPs in the middle).

Value creation is relevant for all three customer groups connected to DSPs:

  1. Advertisers can purchase media inventory in an automated and data-driven way
  2. Publishers can monetize their media inventory, with limited investments in sales human capital
  3. Supporting partners enable the connections and receive a dedicated fee for their services.

DSPs and winner-take-all markets

Gartner has identified 10 relevant DSP players, of which five are defined as “leaders”: The Trade Desk, MediaMath, Google DV360, Adform and Adobe.

Consolidation in the market is progressing fast, potentially leading to a winner-take-all market, as three of the four criteria have been met: strong network effects, high multihoming costs and high entry barriers. Differentiation still remains an open question and market opportunity.

Network Effects

DSPs can build strong ones, cross-side and same-side.

From a cross-side standpoint, the more advertisers and agencies leverage a DSP, the more publishers and supply-side platforms (SSPs) find it beneficial to integrate and offer opportunities such as exclusive deals. The recent integration of Xandr with WarnerMedia or The Trade Desk with TikTok and Amazon Fire are examples of this dynamic. These integrations trigger the positive network effect: incentivizing more advertisers and agencies to connect.

Similarly, cross-side network effects can be triggered with other tech supporting partners that prioritize integrations with fewer DSPs, such as IBM Watson with MediaMath or Google Ads Data Hub with DV360. This also incentivizes advertisers and agencies to leverage fewer DSPs, fueling even more of a self-reinforcing loop of network effects.

From a same-side standpoint, network effects can be created also within customer groups. As more advertisers and agencies leverage a DSP, fellow advertisers and agencies are incentivized to follow suit, considering for example the opportunity to tap into platform-specific knowledge, given the high people turnover in the industry. An equivalent same-side network effect can be created also across publishers, SSPs or tech supporting partners in general: As more partners connect, they can leverage increased amounts of data and improve programmatic efficiency (attracting higher budgets as a consequence).

Multihoming costs

Multihoming is the ability to switch or use multiple platforms.

Costs are quite high, so advertisers and agencies prefer to work with a single platform. Advertisers prefer a single platform as part of their broader best-of-breed or integrated ad tech strategy. Agencies prefer a single platform given the cost and time needed to train trading desks on multiple platforms.

And while publishers may sell inventory via SSPs that connect with as many exchanges and DSPs as possible, they do sometimes prioritize DSPs with the highest budget potential.

High entry barriers

It takes a huge investment to build a complex technology and finance an expensive supply chain, which typically has long payment terms. DSPs carry the burden of working capital and are often obliged to take loans. Today, programmatic counterparts are becoming even stricter with credit following DSP bankruptcies, including Sizmek last year.

There are also relationships and integrations with the different customer groups (such as those needed to trigger network effects, as mentioned above) that can raise these barriers even higher.

Missing ingredient

Low differentiation is the only criteria not yet fully met. Nonetheless, differentiation is declining, especially among “independent” DSPs.

Google DV360, Amazon DSP and Facebook Audience Network all leverage exclusive data and help advertisers address specific business challenges ­– Google with search and YouTube data, Facebook with deterministic socio-demo and interest data and Amazon with purchasing data.

For the independent DSPs to avoid winner-take-all market situations, they must find specific value propositions, which are perceived as clear differentiators by advertisers.

Potential evolutions and solutions

The main objective for advertisers that leverage programmatic buying is to automate and simplify a very complex process by searching and transacting digital inventory in an efficient and data-driven way.

Unless independent DSPs differentiate, we may see a consolidation of power that leads to a winner-take-all situation.

Differentiation could be achieved in several ways:

  1. Publisher or technology partnerships: These partnerships could be similar to those previously mentioned and offer exclusivity in access to publisher inventory, tech partner integrations or data deals with ecommerce players.
  2. Technical solutions: These solutions could be unique bid-filtering algorithms or improved queries per second. (DSP scale would play a big role here.)
  3. Advertiser use cases: Advertisers may seek multiscreen reach optimization and reporting, performance marketing or personalization capabilities. Advertisers may play a big role in determining which DSPs will get a (final?) competitive advantage.

While the DSP landscape is fragmented today, the next 12-18 months will be key. And the external pressures will continue: financial turmoil, increasing privacy requirements and the need to rearchitect identity resolution in a cookieless world.

2 Comments

  1. Gabe Greenberg

    There is low likelihood in my mind of a winner take all in this market. Buyers and sellers must have differentiated outlets and fair competition for a healthy market.

    Reply

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